We used to have fun commenting about the bond market, including Treasuries, Mortgages, Municipals, and Corporates. But that was before the dark times. Before deleveraging.
Contact the Author: accruedint at gmail.com

Wednesday, March 21, 2007

My pre-Fed post was dead on, and I don't mind crowing a bit about it. First a look at the actual statement. There are three key changes.

Housing market was described as stabilizing in January. Now "adjustment in the housing sector is ongoing."

Inflation had "improved modestly" back in January. Now inflation has "been somewhat elevated."

The January statement said that "additional firming... may be needed." Today's statement drops that language entirely.

In isolation, you can't call it a "dovish" statement, but obviously given the market's move the street was expecting a hawkish statement. The Fed is setting us up for a summer time cut, and the market is loving it. The 2-10 slope is now dead flat (more than 6bps steeper on the day). The Dow is up 170 points. Swap and corporate spreads are tighter.

The market is telling you that a Fed cut or two will right our economic ship. That's what I've been saying for a while now.

Where to from here? Well, today's big move in the 2-year and the 2-10 slope will require a little time to digest. So its possible we give back a bit short-term. Over the course of the next few months, the question will become how many cuts do we get. If I'm right, and its only 1-3 cuts, then the 10-year will likely sell off from here, to the 4.7-4.9% range. The 2-year will sell off also, but probably only into the 4.6% range. The long bond should push 5%.

About Me

I oversee taxable bond trading for a small investment management firm. Opinions expressed on this website may not reflect the opinions of my employers. Strategies described here should not be taken as advice, and may not be the strategies being used for my clients. Take this website as the egotistical ramblings of a bond geek and nothing more. E-mail is accruedint *at* gmail.com or find on Facebook.